Cost-Effectiveness and Solar Water Heating

1. Cost-Effectiveness and Solar Water Heating

2. Why is it important to discuss cost-effectiveness (C-E) of SWH? • C-E is a metric by which the CPUC will consider AB 1470 (2007 Huffman): • C-E and ratepayer impact are determining factors in whether the CPUC can move to implement a statewide incentive program for gas-displacing SWH • Concerns surrounding C-E of SWH led CPUC to order creation of SWHPP • Key goal of SWHPP is to generate data and analysis surrounding C-E of SWH • Lack of C-E is the primary barrier to SWH eligibility for utility energy efficiency (EE) Programs: • SWH is already an eligible EE measure, but there is perception (and lack of information to the contrary) that SWH is not C-E

3. C-E and AB 1470 • AB 1470 requires the CPUC to consider the C-E as a pre-requisite to any statewide incentive program • AB 1470 clearly requires the CPUC to consider a number of C-E related issues in considering whether to move forward with a statewide incentive program for SWH. • AB 1470 C-E requirements are guiding analysis of the SWH Pilot Program • CPUC, CCSE and Itron are actively considering the best ways to collect all the data that is needed to fully inform the analysis that AB 1470 requires • The questions relate to identifying the specific analysis needed whether rate-payer funded incentives of SWH are C-E • Now we need public input

4. Cost Effectiveness Language in AB 1470 • 2863. (a) The commission shall evaluate the data available from the Solar Water Heating Pilot Project conducted by the California Center for Sustainable Energy. If, after a public hearing, the commission determines that a solar water heating program is cost effective for ratepayers and in the public interest, the commission shall do all of the following: (1) Design and implement a program applicable to the service territories of a gas corporation, to achieve the goal of the Legislature to promote the installation of 200,000 solar water heating systems in homes and businesses throughout the state by 2017. (2) The program shall be administered by gas corporations or third-party administrators, as determined by the commission, and subject to the supervision of the commission. (3) The commission shall coordinate the program with the Energy Commission's New Solar Homes Partnership to achieve the goal of building zero-energy homes.

5. SWH C-E and California Solar Initiative • Questions about C-E of SWH were first raised in 2006 • In SB 1 (2006), both solar PV and solar thermal technologies were specifically called out as technologies eligible for incentives • Lack of information about C-E of SWH led to the CPUC creation of the SWH Pilot • In CPUC Decision (D.) 06-01-024, the CPUC recognized the need to gather more information about the performance and cost-effectiveness of SWH before offering CSI incentives to SWH that displace electricity • The CSI Program’s non-PV component sets aside $100.8 for non-PV electricity displacing technologies • SWH is currently not an eligible non-PV technology • CSI Program is prohibited from offering incentives until SWHPP evaluation offers C-E data

6. SWH C-E and the California Solar Initiative cont. • CPUC will re-consider the eligibility of SWH as a non-PV measure, but • SWHPP evaluation has to provide adequate data and analysis • This analysis will need to determine what specific C-E metrics electric displacing SWH will be measured against • Finally, this analysis will have to assess the proper incentive level for electric displacing SWH should be • Should it be based upon payback time, % of total system cost, other options?

7. C-E and the SWH Pilot Program • CPUC now looking to SWH Pilot Program to inform future decision making about CSI incentives for elec. displacing SWH and AB 1470 incentives for gas-displacing SWH • Based upon results of SWH Pilot Program evaluations, CPUC will consider whether the CSI Program should allow elec. displacing SWH to be eligible, and also consider whether to create a stand-alone statewide incentive program for gas displacing SWH • Passage of AB 1470 re-emphasized the importance of understanding C-E of SWH • AB 1470 re-focused goals of SWH Pilot Program. Emphasis of evaluation shifted to include efforts to collect more data on both electric and gas displacing SWH and issues that impact cost of SWH on a statewide basis.

8. C-E and Interim Evaluation • Analysis of the C-E of SWH is an important element of the interim evaluation • In CPUC D.08-06-029 (June 2008), the CPUC clearly indicated that an increased emphasis should be placed upon the analysis of the interim evaluation of the SWH Pilot Program • This Decision also expanded the scope of the evaluation to include an assessment of the state of the SWH market across California • The data that is being collected will be the backbone of the C-E analysis of SWH (both elec. and gas displacing)

9. C-E and Interim Evaluation cont. • Question is which metrics should be used to determine C-E of SWH as a measure, and the C-E of SWH incentives as a way to reduce gas costs • The CPUC, CCSE and Itron (the EM&V contractor for the SWHPP) are currently assessing different approaches to assess C-E • The CPUC is also looking to utilize information collected as part of the interim evaluation to fulfill its AB 1470 mandate • “evaluate the data available from the Solar Water Heating Pilot Project conducted by the California Center for Sustainable Energy”

10. Energy Efficiency Program and SWH • SWH is currently an approved EE measure in each of the IOUs 2006-2008 EE portfolios • Each of the CA IOUs include SWH in their EE portfolios, but to date no programs have ever been offered that include rebates for SWH • Energy Efficiency Policy Manual states that SWH must be C-E on a stand alone basis to be eligible for EE rebates • Energy efficiency states that SWH must be C-E on a stand-alone basis (Sec.4, article 7, Energy Efficiency Policy Manual v.4.0) • Though, if the C-E threshold for SWH were on a portfolio basis, then the IOUs could offer rebates for SWH • But only if the specific EE program also included other measures that, when bundled with SWH, met the C-E threshold

11. Energy Efficiency Program and SWH cont. • SWH has yet to be demonstrated C-E • Result is that no EE programs have been offered that include SWH • Another reason why the analysis of SWH Pilot Program is so important • Results of SWHPP could potentially be used to help inform future EE program.

12. So, why is cost-effectiveness so important? • Understanding the calculus that underlies the C-E of SWH will inform market interventions • C-E of SWH is made up of a mix of factors. For example: • Direct costs associated with SWH equipment and installation • Cost-savings of displaced energy • Value of environmental attributes • A more complete understanding of these factors will help us all understand the barriers to the deployment of SWH in Ca.; • barriers: equipment cost, permitting, consumer confidence • As well as the potential benefits of a rate-payer funded incentive program for SWH • benefits: carbon reduction, reduced demand for natural gas, natural gas system stability, pollution reduction benefits, natural gas cost reductions due to reduced demand

13. How do we determine Cost-Effectiveness? • Assessing the different types of C-E metrics, along with the factors that determine C-E, is one of the areas where public input is needed • There are a number of different approaches to measuring C-E. Different metrics may need to be applied for analysis associated with AB 1470 and the CSI non-PV program. • CCSE and Itron are currently considering a number of different approaches to assessing C-E • One option is based upon a calculation of simple payback • though this is only relevant for the owner of the SWH system, and not the ratepayers subsidizing the system • Another approach to calculating C-E is to use the metrics commonly used for energy efficiency programs. • The primary drawback is that this approach only takes into account current costs and benefits, and does not account for market-transformation effect of an incentive program, which might change the C-E of SWH in the future • A potential third option is to consider a levelized cost of energy approach • This model is also flawed because it is based upon assumptions about future energy costs

14. Cost-Effectiveness metrics under consideration • Simple Payback • This approach takes into account the cost of the SWH system, the assumed savings fraction of the SWH and the value of displaced energy costs. These inputs are used to determine how long an investment in SWH will take to payback • IOU Energy Efficiency C-E tests • The energy efficiency program C-E metrics, which are set forth in the standard practice manual are used to determine both the C-E of specific measures and whole EE programs. This approach primarily relies upon four C-E tests • Participant Test, Total Resource Cost, Program Administrator Costs, and Ratepayer Impact Measure • Levelized Cost of Energy (LCOE) • The LCOE approach considers different cost scenarios, for both SWH systems and energy sources. It determines the intersection between the cost of using conventional energy to heat water and the levelized cost of heating water using a SWH. • both the cost of SWH systems and energy costs scenarios and then assesses when SWH systems might become cost competitive with conventional resources.

15. Cost-Effectiveness and environmental benefits • Markets for environmental commodities and AB 32 regulations may change the value proposition of SWH • SWH is recognized as a potentially a very significant source of GHG reductions • The Air Resources Board is also considering SWH GHG reduction potential in its AB 32 scoping plan • The introduction of a system that credits measures that reduce GHG could create a new revenue stream for SWH system owners, thereby altering the cost-effectiveness calculus for SWH • The introduction of GHG caps could increase the cost of natural gas, which also changes the C-E calculus for SWH • In both cases, the value proposition of SWH would change, as would the C-E of SWH • Any C-E methodology that is adopted needs to consider the potential value of the environmental benefit of SWH

16. Important SWH Cost-Effectiveness Questions • What factors drive the cost of SWH, and how does this effect C-E analysis? • When considering the different metrics that should be used to determine the C-E of SWH, we are also going to have to assess the factors that drive the current price of SWH • One of the single most important elements of the SWH Pilot Program evaluation is its assessment of the cost structure of SWH. In a SWH installation there are equipment costs and labor costs. Built into these costs are things like obtaining a building permit and sales and marketing. • Which cost components of SWH are variable, which are fixed? • We are therefore trying to determine which factors are most likely to vary if demand for SWH increases significantly and/or a statewide incentive program is introduced. • Will workforce development training result in reduced SWH installation costs?

17. Important SWH Cost-Effectiveness Questions cont. • Which cost components of SWH are variable, which are fixed? • Will a statewide incentive program increase public interest in SWH, thereby reducing sales costs? • Will increased volume of SWH equipment sales result in lower costs? And, are there innovative business models that can reduce the cost of installing SWH? • How can the analysis of SWH costs inform C-E analysis? • Given all these uncertainties about the cost structure of SWH, how can the CPUC and CCSE account for this variability when we are doing our C-E analysis?

18. Questions?